Why Wall Street should worry

NEW YORK — Talk to anyone on Wall Street and they will tell you they really don’t care about the brewing fiscal storm in Washington. Possible government shutdown? Whatever. Debt ceiling crisis? Meh.

The prevailing view: When Congress returns in September, sabers will be rattled and threats will be hurled. But then, as usual, Washington will grind out a crummy deal that keeps the federal lights on and avoids a disastrous default.

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“D.C. always gets very close to the edge and then in the end finds an eleventh-hour solution,” said Jan Hatzius, chief economist at Goldman Sachs. “It seems hard to believe that we are going to have a really big problem”

But this time — wait for it — could be different. Really, seriously different.

Here is just a sampling of why Wall Street may be wrong: The House GOP is hopelessly fractured on spending strategy. Senate Republicans who might otherwise broker a deal face primary challenges that make compromise potentially deadly. Other Senate Republicans are jockeying for 2016. And congressional Democrats have no appetite for any bargain — grand or otherwise — that cuts entitlement spending.

President Barack Obama at his Friday news conference before leaving for vacation lectured Republicans and mocked their threats to shut down the government rather than fund his signature health care law. Hardly a promising sign for the fall.

“The idea that you would shut down the government at a time when the recovery is getting some traction …,” Obama said, “I’m assuming that they will not take that path. I have confidence that common sense, in the end, will prevail.”

And it is not just a government shutdown or debt-ceiling crisis that could cause a Beltway shakeup of markets this fall.

There is also the possibility of a nasty confirmation fight for the next chairman of the Federal Reserve just as the central bank starts to wind down its program of buying hundreds of billions in bonds to support the economy.

Wrap all this potential dysfunction together and there is a real chance that the fall of 2013 will be more like the summer of 2011, when a near-miss on the debt ceiling led to a ratings agency downgrade, a huge sell-off in the stock market and yet another hit to an economy that might otherwise be heating up nicely.

“There’s going to be some pain that isn’t being priced into market expectations,” said Compass Point Research & Trading analyst Isaac Boltansky. “Right now the markets are doing well, but I don’t think it’s pricing in this impending battle.” Or battles.

Leadership in both parties seem to want a continuing resolution in September that would fund the government through the end of the year. They may get it. But it’s not obvious how. And even if they do, raising the debt ceiling is a much bigger and potentially more damaging hurdle. Comments from lawmakers as they left town for August suggest how difficult it will be.

“[As] the condition of raising the debt ceiling, we absolutely should insist on spending restraints,” Sen. Pat Toomey (R-Pa.) told POLITICO. “On the other side there’s an effort to try to minimize the magnitude of the fiscal challenge that we face because the deficit has gotten a little smaller in recent years. We shouldn’t be lulled into a false sense of complacency. We still are on a completely unsustainable fiscal path.”

GOP Sens. Marco Rubio of Florida and Ted Cruz of Texas, perhaps with an eye on the 2016 presidential race, are demanding that Senate Minority Leader Mitch McConnell block any spending bill that funds Obama’s health care law as enrollment begins Oct. 1. There is no chance Obama would sign a spending bill that takes money away from implementation of his biggest achievement.

Meanwhile, McConnell and Sen. Lindsey Graham (R-S.C.), who might otherwise help push a fiscal compromise, face 2014 primary challenges that may make them less likely to cut deals with Obama. McConnell has been pivotal in recent battles, including the fiscal cliff deal his office hammered out at the last second with Vice President Joe Biden at New Years. Don’t expect a replay this fall.

On top of all this, McConnell and House Speaker John Boehner recently lost several top backroom negotiators to the private sector, making a path out of the current stalemate even tougher.